In the last couple of months, I’ve heard a number of radio ads on ESPN’s Mike and Mike in the Morning for SkoreIt (more information here), a new kind of auction site. Today I dug a little further into QuiBids another similar auction site that I happened across. These sites raised a couple of troubling questions in my mind, most notably how should I feel about a web auction where there’s one winner (that’s typical) but where everyone else is a loser (i.e., they’ve spent and lost money) and where the auctioneer is the biggest beneficiary of all? Is this brilliance or is it preying on people’s inherent greed in a most unseemly way. Is this an auction or is it gambling and should be regulated as such?

Auctions have gone through several iterations, starting with the classic auction site eBay. Since then, we’ve seen offshoots of that model including today’s hot sites, Groupon, LivingSocial and others of its ilk. To the classic auction, they’ve added things like getting your deal free if enough of your friends buy in and getting a lower price the more people who are in on the deal. In all of these models, you’re risking nothing or very little up front and your downside is readily predictable (e.g., you get the price at the time you bid, and nothing lower). Some of these models offer really good deals (LivingSocial recently offered a 50% off deal on a $20 Amazon gift certificate; I got one) but many auctions give limited discounts because they effectively match supply and demand, arriving at a “fair” price.

Along comes QuiBids and others of its ilk, with a come-on suggesting you can get products at 80% or more off of retail. And they seem to actually deliver! So, how do they do it? In QuiBids’ instance, every time you bid it costs you $0.60. The auction continues until no one has bid for 10 seconds, at which time the last bidder wins. Every bid resets the clock and ups the bid price by a penny. Looking at some recent bids, a margarita blender sold for $12.53, a set of Callaway golf clubs went for $57.44, a Toshiba laptop computer went for $28.49 and the bidding for a 64GB 3g iPad was at $81.81. Great deals…for the winners. For everyone else, well, let’s look at the numbers.

The bidding starts at a penny. Every penny increment after that cost someone 60 cents. That means every dollar in the price of the item put $60 in QuiBids’ coffers. That $28 laptop? Over $1,600. The golf clubs? Over $3,400. The iPad? $4,800 and counting. Sure, the individual who wins is getting a great deal. And QuiBids’ economics support these “great” prices as compared with traditional auctions that better mirror supply-and-demand. But is this really how we want to conduct commerce? At $81.61, that means there have been 8,161 individual bids on the product. We don’t know whether that’s two people each betting 4,130 times or 8,161 people each individually betting once. Probably somewhere in between, but we don’t really know.

In effect, QuiBids is running a high-stakes game of chicken and I might even argue that what they’re doing here is not selling things, they’re not an online auction but rather inducing people to gamble at $0.60 a bet.

QuiBids would probably respond in their specific instance “but we offer the customer a safety net.” That safety net says that if you’re not the winning bid, you can apply all of your bids against a “buy me now” price of the product. There are several issues with this approach:

The buy me now price is generally not as good as you could find even through traditional retail channels.

Unless you’re prepared to actually buy the item, this offers you no protection. In other words, if you’re only in this because you can get an iPad for $50 and were not prepared to buy one right now for regular retail prices, you have no protection.

At least with gift cards, on which they offer bidding, if you have to buy it, you’re getting dollar-for-dollar protection and “real” pricing if you end up having to buy it.

I’m somewhat torn over this approach. The winner’s getting a great deal. However, unlike traditional auction models, where there’s one winner and everyone else is neutral, this one is a situation where that one really big winner is subsidized by all the other people who lose real money along with losing the auction. Even if it’s just pennies on the dollar for each bidder, in aggregate this adds up to real money. “What’s wrong?”, some might say. After all, the bidder goes in with full knowledge of the risks of their bid. Well, not so fast there. You don’t have full knowledge. At $81.61 for that iPad, that means there have been 8,161 individual bids on the product. We don’t know whether that’s two people each betting 4,130 times or 8,161 people each individually betting once. Probably somewhere in between, but we don’t really know. You don’t know who you’re betting against or how many of them there are. At least in Las Vegas, I have some general understanding of the odds of rolling a 7 or of any particular number on the roulette wheel. If I’m a card counter, I can actually play the odds in my favor at blackjack. Here, however, I’m gambling blindly. I won’t even get into the potential for abuse here. Could the house have people bidding up the prices on items past a point of profitability? Of course they could.

As you can tell, this one troubles me. The approach makes me feel dirty. Am I overreacting here? What do you think about QuiBids and this general approach which has been undertaken by a number of other sites? Take my survey and also share your thoughts with me in the comments.